Debt Enforcement and Relational Contracting

Brown, Martin and Serra-Garcia, Marta (2011): Debt Enforcement and Relational Contracting. Discussion Papers in Economics 2011-13

Abstract

We examine how third-party debt enforcement affects the emergence and performance of relational contracts in credit markets. We implement an experiment with finitely repeated credit relationships in which borrowers can default. In our weak enforcement treatment defaulting borrowers can keep their funds invested. In our strong enforcement treatment defaulting borrowers have to liquidate their investment. Under weak enforcement fewer relationships emerge in which loans are extended and repaid. When such relationships do emerge they exhibit a lower credit volume than under strong enforcement. These findings suggest that relational contracting in credit markets requires a minimum standard of thirdparty debt enforcement.

• Item Type: Paper (Discussion Paper)
• Keywords: Relational contracts, Debt enforcement, Creditor rights, Banking
• Collections: Economics; Economics > Discussion Papers in Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: C73, G21, O16, F21, F34
• Language: English

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